Wednesday, February 13, 2008

A Seller's Biggest Mistake

Selecting the wrong agent is likely the biggest mistake a seller can make. The wrong agent can cost a seller thousands of dollars in net proceeds and needless months of frustration. Both are almost always related to a seller's lack of familiarity with the market, and poor pricing practices on the part of the agent.

While researching home values in the neighborhoods I have chosen to focus my attention on, I noticed that year after year the values for comparable homes varied by as much as an average $14 per square foot. Since the neighborhoods are tract developments, so wide a spread between top dollar and low dollar struck me as being an indication that something was wrong. None of the factors that could account for disparity in the values could possibly explain such a spread.

Not even a combination of the various factors could explain why one 3-2-2 with 1800 s.f. of living space could sell for $162,000 and another for $187,200—a difference of $25,200 or 15.556%. Even with a swimming pool and 100% brick face, which none of them had, a patio upgrade with a cover and added deck, an air-conditioner upgrade, ceiling fans, extensive landscaping, impeccable lawns, not even tile flooring, and kitchen and bath counters and top of the line fixtures on top of all of that could add so much more value. Upgrades and improvements just don't add their cost to a tract home's resale value.

Something else was afoot. Homes were appreciating at about 3% to 5% per year, but some of the higher sales prices occurred during the early months and some of the lower prices occurred during the later months. That wasn't it either. There was no way to truly gauge seller motivation, which could make a big difference—but median and average priced homes were on the market no more than about 2 to 5 weeks longer than the lowest priced over the first four of the five years I measured. The market was hot. Time and the need to sell quickly just didn't make sense. That is, not without another factor—unrealistic seller expectations.

This is not about unrealistic seller expectations though, because the higher priced listings sold, albeit they were on the market from 87 to as long as 320 days. This is about the difference that selecting the right agent can make. Even the best agent can seldom rein-in the expectations of a seller with an inflated notion of their home's values, but pricing a home for a quick sale does not require that it be placed on the market below market value. A home can sell quickly, and net the seller thousands more if it is properly priced and the right strategy is used. This is especially true when selling a home in neighborhoods where the median priced home is representative of the median price in the market. The homes in such a neighborhood will likely include properties being sought after by everyone from first-time buyers and empty nesters to families of four who are buying their second, third and nth home.

There' a cliché in the real estate business that may explain why so many agents are so unimaginative that they focus only on price to make a quick sale. It goes something to the effect that "Sellers want the highest price, and buyers want the lowest price." This is arguably not always true for sellers, and it misses the distinction between price and cost that is so important for buyers. This is especially true for first-time buyers, but what other buyer does not want to get into a new home at the lowest cost, price not withstanding?

If an agent does his/her homework and does a good competitive market analysis (CMA), price will not be as significant a factor for a prospective buyer if proper buyer incentives are offered as well. Why not price the home at or slightly above the median or average price, and have the seller offer the difference toward paying a stated amount of the buyers prepaids and/or closing costs?

The strategy works, and has worked time and again. Several instances of it were in the data that inspired this article, albeit they appear to have been post facto. The sole caution is that care must be exercised not to price the home above the amount for which it is likely to appraise. The CMA will tell you whether you are within limits. Just price the home below the highest comparable sold property. Just how much lower a price will depend on your estimate of what you believe it can appraise for, and your seller's need to sell and expectations.